Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 20 February 2010
Q&As: Paying off mortgage - and getting rid of badly undiversified portfolio - are two great ideas
KiwiSaver can work well for student
Laying out the details on KiwiSaver exit fees
Buying shares directly from overseas broker cheaper in short run, but may not be wise
Question: I have a general distrust of financial advisers so tend to muddle along making my own financial decisions. I am 45 and nearly mortgage-free, having only $29,000 remaining to pay off.
A few years ago I bought shares in Guinness Peat Group, and bought a few more when the share price was languishing. I now have around 26,000 GPG shares and 1044 Fletcher Building shares.
The GPG shares are now valued at 83 cents, and the price I paid was $1.15! Should I sell them and get rid of my mortgage or wait until they rise in value? We are okay financially, but my aim is to eliminate my mortgage as soon as is practical.
Answer: It's no use crying over spilt money. But that doesn't mean you should wipe up the mess all in one go.
I like your goal of getting rid of your mortgage - and well done to achieve that at 45. I also like the idea of getting rid of a portfolio of just two shares. It's way too undiversified.
You haven't actually done all that badly so far. People sometimes find their one or two shares do horribly, or even become worthless - something that almost never happens if you have a widely spread portfolio. While I don't think anyone is forecasting dire stuff for your two companies, who knows what the future holds?
That applies on the upside, too. Nobody can accurately predict when - or even if - GPG share prices will rise much.
I suggest you sell them in, say, four lots - a quarter now, a quarter in six months, a quarter in a year and a quarter in 18 months. That way you'll get a good price for at least some, which is the best anyone can hope for.
The Fletcher Building holding is probably too small to split four ways, but you could sell it in two lots.
Put the money into repaying your mortgage. Once you are mortgage-free, it would be great if you put most of the money that used to go into mortgage payments into long-term savings. That should set you up nicely for retirement, perhaps even early retirement.
If you invest that money in shares - a good place for long-term savings - either spread it widely or go into a share fund that will do that for you. You don't need to use a financial adviser for that.
Check out the KiwiSaver providers - there's a list under "Providers & schemes" at the top of the home page of www.kiwisaver.govt.nz. Most of them also offer non-KiwiSaver share funds. Oh - and go into KiwiSaver too, from now on, if you aren't already.
Question: My wife is leaving full time employment to become a student. She has no superannuation scheme. Can she join KiwiSaver as a student? If yes, how does it work?
Answer: Any New Zealand resident under 65 can join. If you're not an employee, you miss out on employer contributions. But you still get the $1000 kick-start and the tax credit, which matches your contribution up to $1043 a year. It's well worth having.
Your wife needs to approach a KiwiSaver provider and ask to sign up. For help in choosing a provider, see my column last week - but don't agonise over the choice. It's better to be in any scheme than on the sidelines. You can always move later if you wish.
Generally, it's best to tie up as little money as necessary to get all the KiwiSaver incentives. For non-employees, that means putting in $1043 a year, either as a lump sum or in regular amounts. If your wife can afford further saving - and won't be tempted to withdraw money early for unnecessary spending - she can do it in another investment where she can access the money if needed.
Question: I am writing regarding the question in your last column about the member who transferred from Gareth Morgan KiwiSaver to Huljich KiwiSaver due to the reporting of investment performance.
Firstly, great response. It was good to have an independent person outlining the downfalls of chasing returns and also highlighting the features to look for when choosing a provider.
However, I would just like to point out that Gareth Morgan KiwiSaver don't currently charge any exit fees to members. Our investment statement explicitly states that we are not able to charge a fee until at least 1 July 2010. Our updated investment statement, which will be released later this month, extends this period until 1 July 2012.
We have stated this fee in our documents to keep in line with our values of being upfront and honest about all fees that may be charged now or in the future, which is crucial to allow people to make an informed decision when choosing a KiwiSaver provider.
I do note that you did state that we will charge exit fees in some circumstances. I am sure you will be aware that other KiwiSaver providers, while not stating this explicitly in their documents, also have the ability to charge these additional fees as long as these are deemed reasonable.
Therefore, we do not want to be singled out merely because we have declared that we may charge this type of fee in the future and have committed to a maximum amount for this type of fee.
(Signed) Karena Goodall, manager of client services, Gareth Morgan KiwiSaver
Answer: When I wrote "The Complete KiwiSaver" a year ago, I asked all KiwiSaver providers if they charged an exit fee. Only three said, "Yes" - Gareth Morgan, Grosvenor and Staples. For space reasons, I didn't go into detail last week but said - as you note - these three charge the fee in some circumstances.
To keep everyone happy, here are the circumstances: Gareth Morgan may charge $50 after 1 July 2010 - now changing to 2012. Grosvenor charges $30. Staples Rodway may charge up to $25 if the member leaves within two years.
All the other providers specifically said they didn't charge exit fees. If any reader knows of others that have charged such a fee, let's hear about it.
Question: In your Herald column two weeks ago, you dealt with two questions about investing in international index funds.
You didn't mention the most cost-effective way for a small investor, which is to open a brokerage account in the United States. This is quite straightforward to do, and gives access to hundreds of different closed-end or "exchange-traded" funds (ETFs).
These are listed on the US stockmarkets, so can be bought in the same way as individual company shares. Vanguard have ETF versions of many of their funds, and there are plenty from other providers too.
These investments can be bought through NZ-based sharebrokers, but (at least in the case of one broker I know of) this involves custodial fees of tens of US dollars per holding per year, which would be prohibitive for small holdings.
It seems better to use a broker based in the US, where brokerage costs are lower and there are no ongoing fees.
I have used this method to invest in two index funds. Opening a brokerage account required a minimum US$2000 (in total, not per investment). The brokerage was a flat US$10 per investment. Other brokers claim to offer even lower transaction fees and/or no minimum account size.
The only disadvantage to this approach may be that the brokerage account, once opened, offers access to a lot of other things besides ETFs and company shares: margin loans, commodities, equity options, etc. More than enough rope to hang yourself, if you were that way inclined.
Answer: Indeed. And that's not the only pitfall of investing directly in international shares and running your own portfolio, according to Stephan Jonas, head of client services at investment advisory firm Craigs Investment Partners. He lists the following possible problems - all of which are eased or eliminated by the use of a New Zealand sharebroker's custodian service:
• "The first hurdle will be opening an account and fulfilling the various anti-money laundering client identification requirements of an international broker," says Jonas. In New Zealand brokers have to sight photo id and bank account details and complete other paperwork. "If an international broker is not requesting this information then they may not be fulfilling their own 'know your client' obligations," - which could lead to future complications.
• You will be responsible for knowing about, and filing, tax declarations and returns in New Zealand and other countries.
• Unless you monitor your investments, you might miss out on bonus or rights issues and the like. What's more, "often timeframes are too short for individuals to wait for the documentation from international issuers to be delivered via the normal post." You may not get your papers back on time.
• You'll need to arrange banking facilities for payments from issuers. "We are striking more incidents where issuers will not pay dividends into non-local bank accounts," says Jonas. "Even some Australian issuers now insist on paying remittances into Australian bank accounts." He adds that opening a foreign account is becoming more difficult. And even if a foreign company will pay into a New Zealand bank account, "there will be receipt handling and conversion charges." On the other hand, "a custodian will operate bank accounts in each major market and will be able to receive and remit proceeds to clients' preferred bank accounts."
• When you die, your holdings will need to be transferred to your estate. This takes time and can be complicated, sometimes costing thousand of dollars. "If the positions are held by a custodian then a transfer to an estate can be executed locally," says Jonas.
He adds, "It is true that the costs associated with providing custodial services are increasing as the legislative and compliance rules change. But the problems and costs associated with missing a corporate action, receipting a dividend or trying to prove ownership are far greater."
Of course we need to keep in mind that Jonas has a vested interest in saying all this. But it rings true.
You have perhaps kept things simple enough that you haven't struck problems. But some might come back to bite you. Doing it your way might be cheaper - at least in the short run - but it could end up being more complicated.
Still, thanks for telling us about it. If you're willing to run the various risks listed above, good luck.
* Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.